Weekend Strategy Review September 2, 2018

U.S. stocks were mixed on Friday as the currencies of several emerging markets rattled international markets. The Argentine peso and Indonesian rupiah joined the Turkish lira in significant declines that pushed the dollar higher. The lira fell almost 3 percent in its fourth straight day of declines as the economic crisis in Turkey worsened.

The Dow finished down 22 points on Friday, at 25,965. It was up 174 points for the week. The tech heavy NASDAQ was up 21 points on Friday as international money flowed into tech stocks. The NASDAQ was up 164 points for the week. Both indexes remain on VTI-volume indicator Buy Signals and in the Trend Mode. However, this could change once we get past the early part of next week, so pay attention to the signals.

The decline in emerging market currencies is causing capital from around the world to flow into the U.S. stocks, particularly stocks that are not impacted by a rising dollar. This international flow of money is being offset by the Feds ‘unwinding’ program which is tightening the money supply and pushing interest rates higher. And while a rising U.S. dollar makes it much more attractive to international investors, it could also cause problems in the future. Big problems!

The reason we need to be concerned about the Dollar now is because of the amount of debt in the world. By some estimates, world debt is as high as 225 percent of the world’s gross domestic product. That’s a huge amount of debt that needs to serviced. So, IF the Dollar continues to rise, a lot of this world debt won’t get paid back which will cause the economies of these countries to implode. This is what’s happening now in Turkey. Imported goods priced in dollars (like oil) are becoming extremely expensive. This is really hurting the Turkish consumer. The danger is that it could spread to Europe and other parts of the world as investors in banks that hold Turkish, Argentine, and Indian debt start to realize that they might not get repaid. This will likely cause the stocks of these banks to decline, which could cause a global market decline that will eventually spread to the U.S.

So, with the U.S. markets approaching major targets as they trace out the final waves of their Ending Diagonal Patterns, we need to be on our toes. This is not the time to be complacent. We need to pay attention to the indicators.

Right now, the VTI-volume indicators on the U.S. equity indexes are still positive. But Friday’s rise in the Dollar caused the VTI-volume indicator on Gold to turn neutral again. Last week, I commented that we could see a whip-saw in the gold signal. And this is what’s happened. It could just as easily turn positive again if things calm down in Europe next week. If it stays neutral, I’ll continue to hold my ‘trial’ positions in gold.

One interesting thing happened on Friday that students should note. As money flowed out of Europe into U.S. tech stocks on Friday, it caused the Sector Ratio to increase to 21-3 positive. The RS values of the sectors is very low at this point, so it’s easy for a sector to jump from one List to the other now. I wouldn’t get too excited about the strong Ratio now, because a few down days next week could easily turn the Ratio back to a more neutral reading. But if the Sector Ratio stays positive, I’m not too worried about the overall market. It’s when the Ratio turns negative that I’ll become concerned.

The Strong List continues to be led by defensive sectors like Household Products, PharmaBio, FoodDrugs, Telecoms, and Transportation. The three Weak Sectors were Service, Autos and Retail. Students should note that the Materials sector finally moved off the Weak List. Now if only the VTI-volume indicator would turn positive, it could start a rally in gold!

Only getting the Professor’s Weekend Review? Try his daily update Cum Laude service for 2 weeks only $9.99 LEARN MORE

All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.